Common input credit and exempt clearances may trigger Rule 6 liability when separate accounts are not maintained

Where a common input such as hydrochloric acid is used in the manufacture of both dutiable and exempted products, CENVAT credit can be disputed if separate accounts are not maintained under Rule 6(2) of the CENVAT Credit Rules, 2004. The commentary notes that, on the stated facts, gelatin was cleared on duty while phosphoryls were cleared as exempted goods, and the absence of reversal of credit supported a prima facie demand for the prescribed percentage of the value of exempted clearances under Rule 6(3)(b). In the absence of pleaded financial hardship, pre-deposit was directed.

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Issues: Whether the appellants were required to make a pre-deposit on the premise that hydrochloric acid was a common input used in the manufacture of dutiable and exempted products, attracting Rule 6(3)(b) of the CENVAT Credit Rules, 2004.

Analysis: The goods in question were manufactured from animal bone using hydrochloric acid, with gelatin being cleared on payment of duty and phosphoryls being cleared as exempted products. The appellants had taken CENVAT credit on hydrochloric acid but had not maintained separate accounts for its use in the dutiable and exempted products as required by Rule 6(2) of the CENVAT Credit Rules, 2004. The order also relied on the Larger Bench view that similar facts attracted the corresponding provision under the earlier Central Excise Rules. In the absence of reversal of credit and in the absence of pleaded financial hardship, a prima facie liability to pay the prescribed percentage of the value of exempted clearances was found.

Conclusion: The appellants were directed to pre-deposit Rs. 50,00,000 within four weeks.

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